Thursday, December 18, 2008

For Wall Street, much of this decade represented a new Gilded Age. Salaries were merely play money — a pittance compared to bonuses. Bonus season became an annual celebration of the riches to be had in the markets. That was especially so in the New York area, where nearly $1 out of every $4 that companies paid employees last year went to someone in the financial industry. Bankers celebrated with five-figure dinners, vied to outspend each other at charity auctions and spent their newfound fortunes on new homes, cars and art.

The bonanza redefined success for an entire generation. Graduates of top universities sought their fortunes in banking, rather than in careers like medicine, engineering or teaching. Wall Street worked its rookies hard, but it held out the promise of rich rewards. In college dorms, tales of 30-year-olds pulling down $5 million a year were legion.

While top executives received the biggest bonuses, what is striking is how many employees throughout the ranks took home large paychecks. On Wall Street, the first goal was to make “a buck” — a million dollars. More than 100 people in Merrill’s bond unit alone broke the million-dollar mark in 2006. Goldman Sachs paid more than $20 million apiece to more than 50 people that year, according to a person familiar with the matter. Goldman declined to comment.

Pay was tied to profit, and profit to the easy, borrowed money that could be invested in markets like mortgage securities. As the financial industry’s role in the economy grew, workers’ pay ballooned, leaping sixfold since 1975, nearly twice as much as the increase in pay for the average American worker.

“The financial services industry was in a bubble," said Mark Zandi, chief economist at Moody’s Economy.com. “The industry got a bigger share of the economic pie.”

Some of all that compensation was in the form of company stock, which at almost all financial services companies has lost most of its value. But enough of it was in cash to make these guys millionaires many times over, often on the basis of investment decisions the consequences of which they had no reason to be concerned about because they already had their money. Naturally, your stake in the ultimate outcome of various investments is lower when you already have the money to walk away.

Incredibly, there are still people who will argue that what we need right now is either less regulation, or at least not more regulation. But what this article, as well as many others that we've read about Wall Street over the past few months, makes clear is that in a business sector that was left largely to arrange matters for itself, one perverse and distorted incentive after another arose naturally from the desire of humans to profit handsomely while turning a blind eye to risk (or avoiding it altogether, as with these highly compensated traders.) At this point, anyone who holds the freedom of the market as the highest of human ideals, resides on the gullibility scale somewhere near creationists and JFK conspiracy theorists.